Mozambique: Globalization and Domestic Policy Choices Frank Flatters Queen’s University, Canada May 4, 2006

2 2 Purpose Assumption: The real question is not whether to integrate with the global economy, but how to integrate most successfully Explore lessons from Mozambique and elsewhere to discuss policy options for global integration –A few key do’s and don’ts

3 3 Outline Context Private and Public Sectors Trade Diplomacy and Unilateralism An Agenda for Mozambique

4 4 International context Growth, trade, jobs and poverty reduction –Openness is necessary but not sufficient Globalization of production networks –Export-led growth or import-led growth? –Logistics and trade facilitation Many general lessons but no unique solutions

5 5 Domestic context Mozambique has come a long way in a short time But it is still poor and has a long way to go Some hesitancy and confusion about the way forward

6 6 Private and public sectors The private sector must drive growth, but in a policy framework set by government The government must listen to the private sector but must be independent, represent all interests and avoid capture Global competitiveness as a guiding vision

7 7 Trade diplomacy Use trade negotiations to support and lock in beneficial reforms, not to delay them –Induced mercantilism and the fallacy of “concessions” Dangers of regional agreements and how to avoid them –Market size, trade diversion, complexity (tariffs, rules of origin), policy diversion –Grant all preferences on a multilateral basis

8 8 Do it yourself—Unilateralism What Mozambique needs it can do for itself; but watch out for dangers –Infant industries, declining industries, and adjustment –Tax incentives –Dumping and subsidies –Development finance

9 9 Agenda for Mozambique Focus on domestic reform Import policies Export policies Investment reform

10 Focus on domestic reform Mozambique’s comparative advantage is in improving its own policies, not those in the United States or EU The focus needs to be the entire regulatory regime, at the border and behind the border Implementation is the most difficult part

11 Import policies Continue nonpreferential tariff reform –High rates on final goods, surcharges, cascading Customs and trade facilitation –Excessive focus on revenue and control –No need to put imports in cold storage before release

12 Export policies The best export incentive is easy importing (import-led growth) –EPZ and other import facilities (VAT, duty drawbacks, etc.) as immediate first steps Regulations, red tape, poor infrastructure, and weak service sectors tax exports Export taxes and restrictions hurt the poorest

13 Investment environment Mozambique’s “high cost” economy is due largely to well known domestic policy failures –Laws and regulation: labor and land laws, financial regulation, business licensing, legal system –Infrastructure and services: roads, transport, telecoms, education –Taxes: low rates, broad base, and no incentives Improvements in all these areas are a necessary complement to trade policy reform

14 Can Mozambique compete? Yes – but it requires an environment that encourages and facilitates investment, employment, imports, and exports The current regime raises costs, rewards rent- seeking and discourages competition